No Vacancy at the Hotel Brodsky
The news from Tioga, North Dakota, is that Black Gold Suites—the new hotel I'm building there (see "Black Gold for You and Me," September 2011)—will open on March 1. But don't bother trying to get a reservation: By then, we'll have been booked up for the next three years. How that's happening is a story in itself and contains a couple of useful lessons about negotiating.
You may recall that, shortly after we worked out a deal with the city of Tioga in April 2011, we put up a billboard on our site announcing our intention to build a hotel, and we included a toll-free phone number. We hoped some of the big employers in the area would call to ask about reserving space. And call they did. In spades. We told them that the hotel would be completed in nine or 10 months. Several of them said they wanted to meet with us. We said we weren't ready to meet.
Understand, I was dying to meet with them, but I didn't think the time was right. I believe that in negotiating, you should never ask for something you're pretty sure you won't get. What I wanted from the employers were letters—or, better yet, contracts—indicating their intent to reserve a certain number of rooms for an extended period of time. I could then use those contracts to get a bigger loan from the bank. But I had reason to believe the employers wouldn't be willing to sign any letters or contracts until somewhat later.
A little background here: As I explained in the September column, the use of the new (and controversial) practice of hydraulic fracturing, or fracking, has led to an oil boom in northern North Dakota that has drawn thousands of workers to the area. The result is an acute shortage of lodging, which I proposed to help relieve by building an extended-stay hotel. I wanted the local bank to give me a loan, but I knew that no banker in his right mind would offer me a construction loan. After all, I was talking about building a 100-room hotel in a town of about 1,300 people. It was far too risky a proposition for the bank. So I didn't ask for any upfront money. Rather, I proposed that the bank give me a loan after Black Gold Suites was built, when the risk would be much lower. I'd finance the first hotel myself, to the tune of about $6 million. Then I would use the bank's money to finance the two other hotels we were planning to build on land we'd bought elsewhere in North Dakota.
That was a deal the bankers could make. They indicated they would be willing to let me have a loan amounting to 50 percent of what it had cost to build the Black Gold Suites in Tioga. It was a good offer, but I wanted more, and I figured I could get it if we had long-term commitments for all our rooms by the time we completed construction.
I had a sense, however, that we were unlikely to get any commitments from the big employers before we had a building to show them. First, there was the response I'd received when I'd asked the city auditor why the Hess oil company hadn't built lodging for the dozens of people it employed in the area. "We've had them in here," she'd said. "They told us, 'It's not the business we're in. We pay these people plenty of money. Somebody else will come along and do it.' " In other words, Hess didn't want to get involved in the construction of hotels.
What's more, I'd learned that someone else had already tried, and failed, to build a new hotel in the area. The would-be hotel builders who'd preceded us had gotten only as far as pouring the foundation. I had to assume that they'd attempted to raise capital before they'd abandoned the project. No doubt they had approached the big employers for commitments and been turned down. If I went to those same employers and didn't have a hotel to show them, they'd figure I was just like the previous group—an underfinanced builder who couldn't be counted on to finish the job. I wanted to avoid that association at all costs.
Now, I suppose you might wonder why I didn't just have preliminary meetings with the employers who'd called in and then set up a second round of meetings when the hotel construction was further along. That brings up another negotiating principle: Never assume you'll get two bites of the apple. In my experience, more than one bite is rare. What's more, I thought that having meetings before we were ready to do a deal would show weakness, and that would hurt our negotiating position later on. In the first meeting, people would ask us what we wanted. We'd have to inform them that we'd subsequently be asking them to reserve a bloc of rooms. They would thus come into the second meeting with the understanding that we needed them, which would have put us at a disadvantage.
On the other hand, if we waited until it was clear to everybody that the hotel was going up without outside financial support, people wouldn't know exactly what we wanted until we sat down together. That would enable us to negotiate from a position of strength. We'd be offering the employers an opportunity, not pleading for their help. We could say—truthfully—that we'd received numerous inquiries from companies interested in leasing our rooms and we were pretty certain that they would go fast. We would be able to tell the employers that, before we opened for business, we were giving select customers the chance to sign a lease guaranteeing them as many rooms as they thought they'd need.
And that's exactly how we played it. People who called for a meeting were told, "Yes, Mr. Brodsky is the person you need to speak with, but he is away for the next couple of months." That was also true: I was doing a lot of traveling. "He'll be happy to talk with you when he returns." Meanwhile, construction proceeded apace.
I'd decided to wait until the framework and the outside walls went up. If you've ever built a warehouse or some other structure, you know that, with the walls in place, it appears as though the majority of the work has been done, although you're probably just a quarter of the way there. You still have to do all the interior construction, the wiring, the plumbing, and so forth, but most people don't see that. What they see is a building that—from the outside—looks very similar to the finished product. They assume the rest of the work will be completed in short order.
Our construction crew raised the walls of Black Gold Suites in November, and we began having meetings with prospective clients shortly thereafter. We'll wind up with five or six firm commitments. Then I'll go back to the bankers with a deal that I think they'll be quite willing to make, since it will involve even less risk than they've been expecting.
And, oh, yes. You are all welcome at the grand opening next month. Just remember that you may have trouble finding a place to stay—and the temperature, with the wind chill, is likely to be about 20 below zero.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.